THE IRS SHOULD FIX ITSELF FIRST

January 14, 2010

The Internal Revenue Service's (IRS) new effort to cut down on errors and fraud by clamping down on tax preparation services is commendable. However, with so many other underlying problems, wouldn't it be easier just to simplify the tax code instead, asks Steven Malanga, an editor for Real Clear Markets and a senior fellow at the Manhattan Institute?

Some 80 percent of households now use tax preparers or tax software to figure out their returns, and collectively we spend 7.6 billion hours on tax compliance, according to the IRS Taxpayer Advocate, at a cost of nearly $200 billion annually.

From 2001 through April of last year, Washington initiated 3,125 changes to the tax code, or more than one a day.

None of this is par for the course, says Malanga:

Around the rest of the world, countries have been simplifying their tax code by flattening out rates, eliminating deductions and ending tax credits.

One recent study ranked the U.S. tax code 122nd in complexity among 175 nations worldwide.

Our politicians have created this mess because rather than use our tax code for what it was designed, that is, to raise revenues, they now wield it as an instrument of social policy, says Malanga. Every politician whose campaign platform includes goals like increasing home ownership or lessening the financial burden of college tuition or encouraging more energy efficiency wants to do it through the tax code. Tax credits are also a way to reward donors and lobbyists for friendly causes.

But ultimately the complexity of this approach befuddles not only taxpayers and preparers, but even the IRS, says Malanga.

Unfortunately, there is not much of an 'tax simplification" constituency out there, so that even when the winds of political change blow again, it's likely we'll just get a whole new set of politicians looking to use the code to advance their causes, says Malanga.